Firm reprimanded for client money regulations failure

The ICAEW disciplinary tribunal found Merseyside-based firm Butterworth Barlow Ltd had failed to comply with client money regulations by making unauthorised withdrawals.

Between September 2014 and March 2015 Butterworth Barlow withdrew money from its client’s bank account to help with the firm’s cash flow.

The issue was discovered by the ICAEW’s quality assurance department after a routine practice assurance visit. Butterworth Barlow Ltd had transferred from their client’s bank account to the firm’s office account, the following amounts:

£5,000 on 23 September 2014

£5,000 on 7 November 2014

£5,000 on 25 November 2014

£3,000 on 24 February 2015

£7,041.40 on 5 March 2015

The firm had received from a client £17,152 in respect of the client’s corporation tax liability not due to be paid to the HMRC for seven months. The money was paid into client account.

The firm then experienced continuing cash-flow problems in relation to its office account. Money was transferred to office account on five occasions in order to avoid the firm exceeding its overdraft facility. The first and fourth payments were transferred back to client account within a matter of days.

In March 2015, the whole of the client’s corporation tax liability was paid to the Revenue from office account following receipt of a loan to the firm from a finance house.

While there was no loss to the client apart from a small amount of interest, the disciplinary committee deemed the firm’s use of a client’s money to ease cash flow to be a “serious breach of an accountant’s obligation to his clients”.

In separate disciplinary proceedings Butterworth Barlow’s directors Barry Barlow and Gavin Butterworth each received a severe reprimand, a fine of £2,000 and were charged costs of £2,835.

The tribunal highlighted two transfers which totalled £10,000. Butterworth Barlow was said to have used this money to fund its business over a four-month period, and the firm was only able to repay the amount after securing a loan.

The tribunal noted that the March payment to the Revenue was seven weeks before the tax had to be paid. Butterworth explained that he wanted the payment out of the way due the stress it was causing.

Barlow indicated that during the client money transfer period he was under personal stress. The firm had also suffered financial pressure. He accepted that the transactions breached client money regulations.

Butterworth, although accepting that the misdemeanours were contrary to ICAEW rules, explained that at the time of the transfers he was unaware of the detail of the client money regulations.

However, the tribunal was unconvinced: “It is inconceivable that he did not realise he was breaching the rules regarding client account,” the tribunal said.

The ICAEW disciplinary committee took into account this being the defendants’ first offence but concluded: “The firm had used a substantial sum of client money for its own benefit for a long period of time. It had disregarded other important obligations in respect of holding client money. This was conduct which was worthy of nothing less than a severe reprimand.”

The firm received a severe reprimand, a fine of £3,000 and costs of £3,896.

The message from the tribunal is that client money is sacrosanct and must only be used in accordance with the client’s written instructions.

There would have been nothing improper had the firm taken a seven-month loan from the client (a non-audit client) in respect of the full amount held, provided this was recorded in writing with the firm paying a commercial rate of interest. The firm would have had to ensure that it had the means to repay the loan at the end of the agreed term.

The firm faced other infringements including:

Failing to transfer the amount held into a designated client account 30 days from receipt.

Failing to reconcile client account every five weeks.

Both these complaints crop up on a regular basis and seem to catch out even the biggest of firms. No harm indulging in a little bedtime reading – namely the Client Money Regulations.

surprised by people saying they choose not to use a client account, the regs are not exactly complicated, you just dont use client's money simple as that.
Back in the days when we had many subby clients using the client account for refunds was the only way to get paid.

Operating and reconciling a client account in itself isn't the problem, at least not for me, I think any accountant should be able to do that.
The problem was with HMRC, on 3 separate clients they informed me and the client that refunds were being issued to our client account, the refunds didn't appear for a considerable time (from memory it was several weeks, and possibly even a couple of months on 1 instance). This resulted in the client chasing us for the money constantly, which hadn't been received, and no matter how much you explain that it's HMRC fault to the client, I feel that they always have that niggling doubt.
Overall I decided that I didn't want HMRC tarnishing my credibility, so I got rid of the client account and now direct any refunds to the client themselves. It's far less stress as a result, and as there was never any benefit to us of holding the client account we haven't lost anything anyway.

I don't, luckily, have the type of clients where I need to deduct my fee from their refund, that was never the purpose of our client account.

I have to agree - as long as you don`t use other people`s money there is no problem. As we work in the film industry we keep film specific clients` accounts in which funding is received and then the production costs are paid from. When revenues come in they go back in that film specific account. Each film has its own company, VAT and client account so that each film is completely ring fenced. On the brighter side, when we last had a compliance visit they awarded us as a Quality Assured firm for the way we handle so many accounts.

Extract above
'In separate disciplinary proceedings Butterworth Barlow’s directors Barry Barlow and Gavin Butterworth each received a severe reprimand, a fine of £2,000 and were charged costs of £2,835.'
Also
The firm received a severe reprimand, a fine of £3,000 and costs of £3,896.